Much More Than Tax Cuts Needed To Revive Consumer Spending

The tax give-away is worth just Rs 1 lakh crore in one financial year. Much of this money will be spent by the less than 1 crore  people, some of whom would spend part of the money in paying back old debt taken to run their households during the past few years when inflation was running high eating into their savings. 

But even with the remanants of the tax give away which may find its way into the marketplace, the impact may not be much despite the fact that a multiplier effect on consumption expenditure usually ensures that Rs 3 come into circulation with Rs 1 spent. (In simple terms the multiplier effect is refers to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of money.)

Estimates are that India’s local biscuits market alone is worth US $12.46 billion in 2024-25—Rs 1,05,910 crore. Straits Research pegs the country’s pan masala market at US $5.28 billion in 2023-24—Rs 44,880 crore. SSPH Journal values the  bidi market at US $4.12 billion—Rs 35,040 crore. India Fashion Forum values the market for local-made innerware at US $7.84 billion—Rs 66,703 crore. Do note that these are local brands of these products and, therefore, consumed by lower-income groups.

Other End of The Spectrum: Indirect Taxes

In just these four product lines, lower- and middle-income India spends Rs 2.53 lakh crore each year. Hypothetical it may be, but this analogy proffers that the direct tax (read ‘Income Tax’) relief provided in Budget 2025 would need to be increased by two-and-a-half times to create the revenues of these four sectors alone. Shoring up the entire industry and market is a far bigger task.

In the sales figure for the four product lines listed above, if we assume a tax component of 18 per cent, it amounts to Rs 45,456 crore, hypothetically erasing nearly 50 per cent of the total tax benefits accorded to India’s salaried class. And when we understand these are just four low-tier items bought by India’s lowest-rung salaried people, the postulate becomes intimidating.

Bring in more expensive sectors such as automobiles, white goods, travel and hospitality, healthcare and medicine, gems and jewellery, real estate and more, and the level of indirect taxes and other levies would leave most gasping. No wonder that the PMI (Purchasing Managers’ Index) — which tracks sales, employment, inventories, and price data of manufacturing sector companies — has shown a sharp decline to 56.4, the lowest in 12 months. 

Consumption by India’s 294 million households has nearly trebled in a decade to Rs 292 lakh crore in 2024-25, over the past decade and accounts for 57 per cent of India’s total consumption.  Stimulating it will certainly help, but Rs 1 lakh crore in tax giveaways, which may or may not be used for consumption, and most certainly be eroded by indirect tax collection may not be a strong enough medicine for the slowing economy. 

That being said, it bodes well that Finance Minister Nirmala Sitharaman has showcased the Modi 3.0 Government’s intent to provide succour to the masses at a time when the Indian economy is facing multiple challenges. The attempt is to counter slowing growth, rising prices and flagging consumption among the middle class in Asia's third-largest economy.

As the Finance Minister herself said in her Budget speech: “The new structure will reduce taxes for the middle-class and leave more money in their hands, boosting household consumption, savings and investment.”

Initial Cheer Replaced by Cautious Optimism 

The simple fact is that the Finance Minister has had to walk a delicate balancing beam, pushing economic growth while keeping a peripheral hawk eye on Government spending and outflows. It is this that led Sitharaman to reiterate in her speech that she was committed to reducing deficit to 4.4 per cent  by 2026, from the present level of 4.8 per cent.

Global rating agencies are obsessed with these numbers, as lower debt levels provides better investment ratings and a reduction in borrowing costs. Like much of the world, India’s economic growth has been slowing over the last few years, raising questions on fiscal prudence and expenditure.

Add to this the Economic Survey released a day before the budget, which admits that the Government expects GDP growth to slow to between 6.3 per cent and 6.8 per cent by March 2026.

It is also a reality that after a period of near-world-best growth of 8 per cent and more, India now faces its slowest economic projections since 2020, with static wages and food inflation hitting consumer spending and corporate profits, leaving their tell-tale ‘stop spending’ spoor on the consumer firmament.

See-Saw of Economic Dreams Vs Ground Reality

It is this see-saw of economic dreams and reality that initially saw the masses and stock market cheer and celebrate the budget. The tax sops jet-started a rebound in scrips such as automobiles, consumer goods, and realty and media companies. But as the dust settled after an exuberant weekend, Monday saw the stock market turning cautious and bearish, shedding over 40 basis points.

Population is a double-edged sword. It gives India incredible purchasing power, a vast talent pool and labour force, and an enviable diversity and culture. It also makes for a sea of people who have to be nurtured in trying times. We are in trying times today, and our nation needs to feed 142 crore people, provide them with facilities such as housing, healthcare and education. It is a tough ask.

The task gets tougher when only around 8 per cent of people are in the direct tax net, of which a majority file ‘zero tax’ returns. Thus, the burden of shoring up revenue mop-ups falls on a smattering of salaried people. This is where indirect taxes come in, to make the otherwise untaxed (and the taxed) cough up a bulk of the required funds for the Government to function, to govern.

What impacts collections but hits the common man’s pocket is indirect taxes. Sip a cup of coffee or tea. Bite into burgers and namkeens. Buy a fridge or AC or washing machine. Get oil, vegetables, pulses and rice to prepare a meal. Soap, shampoos and detergents for a bath and clean-up. If you are really adventurous and brave, buy a new car or a home. The extent of indirect taxation will seep in.

Indirect taxes have been left untouched, with no relief announced. This is not surprising, given that it fuels the Government engine. However, it also makes up a chunk of every Indian’s cash outflow, thus being the key deterrent impeding an expenditure boomerang. 

The Government has made a beginning and put more disposable income in the hands of Indians with the income tax relief. Tweaking indirect taxes and making up the resultant shortfalls—perhaps with a broader tax base and taxing the super-rich more—could be a next logical step. India showed an appetite for spending after reforms increased incomes in the 1990s and early 2000s. Some more whetting and petting on that front could get the spending cats to purr again.

(The writer is a veteran journalist and communications specialist. Views are personal)